Volatility Strategy: 10 Key Messages for Wary Investors
Many investors are carrying the scars of the past five years into 2013, perhaps to their own detriment. Some may lose money sitting in cash or fixed income while failing to recognize some long-term opportunities. Others may be too keen on trying to time the market to avoid potential downside.
“If you’re a worrier, which I am, you can find new things to worry about in the wake of good things happening,” Ed Katz, advisor and senior vice president – investments at Wells Fargo in Atlanta, said. “That sort of sums-up January in the equity markets. Everyone’s so gun-shy.”
To clear up some misconceptions, Wells Fargo explains some of the less focused-on market trends that investors and advisors should keep in mind and also offers some timely reminders that are relevant no matter what direction the market turns.
Click ahead to see the top ten ideas that advisors and clients should keep in mind featuring commentary and anecdotes from Katz’s practice.
Fearful investors have flocked from equities, but that's where there has been some strong growth, Wells Fargo said. The S&P 500 index, on a total-return basis, was up 16.0% in 2012 and nearly 129% since March 9, 2009.
"There's no shortage of stuff to worry about," Katz said. "But the markets had a great 2012 and the bottom line is that it's really nice to enjoy it."
Wells Fargo said that many investors are making a mistake by chasing past performance in fixed-income. The firm remains very cautious about fixed-income because the actions that the Fed is undertaking could be inflationary over the long-term, the firm said, which could make for a decline in the purchasing power of the fixed income stream.
Katz had a "sophisticated" client who sold all of his bond funds last week.
"I don't think rates are going to start climbing rapidly any time soon," Katz said. "But once it stats to happen, that's what the firm is worried about. You're going to see clients get concerned, and that fear will then accelerate."
According to Wells Fargo, the U.S. economy has been in recovery mode for the past three years and is doing modestly better. The firm cites rebounds in the auto and housing markets as driving further growth, especially if the jobs report improves.
There's no cause for alarm over mass municipal bankruptcies, the firm said. However, Katz still says investments around this area remain unattractive.
"I would tie the municipal conversation to the point about fixed income," he said. "MUNIs may have less of a default risk, which makes them sort of attractive, but they're still a bond."
Will the level of volatility, many jittery investors are "petrified of awful days and concerned with trying to avoid losses or catch the market at a turnaround, Katz said. But as he will tell you, it's virtually "impossible to get it right."
Katz is in a unique position having partnered with his father who is 82, which keeps them more focused on the long-term and less likely to over-think events.
"The nice thing about having a partner like my 82 year-old dad is that he comes from a different time where he doesn't even have a short term opinion," Katz said.
Moves by the U.S., European and Japanese central banks are helping the global picture improve, according to Wells Fargo.
"We see international markets continuing to trend higher long-term as economic growth in developed market stabilizes and economic growth in emerging markets accelerates."
Katz said it's unfortunate that some of the clients who come into his office perhaps started saving too late or may need some higher concentration of stocks to help drive income. However, there is good news for some late bloomers. According to Wells Fargo, someone who invests $6,500 annually from age 50 on could end up with as much as $194,386 by age 67.
The Fed funds rate, which Wells Fargo uses as a barometer for cash yields, remains at a historic low. Couple that with the fee that most firms charge for selling out of positions and moving into cash and you're already paying for it outside of missing out on potential market upswings, Katz said.
Rather than timing the market, Katz focuses on using asset allocation to assuage worried clients. Putting among three categories of investments can help find growth. While it is more difficult now because he is avoiding bonds, Katz said that he likes to help mitigate that downside by allocating to Wells Fargo's Dividend Stock Investment Program which can supplement rough patches in the bond market.
"So while a diversified portfolio may not give you the highest absolute return in a given year, it most likely won't give you the biggest loss either," Wells Fargo said. "Investors can focus on making progress toward their long-term goals."